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9:00 AM EST, Thursday, December 20, 2007: The Parade of The Cockroaches. The subprime contagion is the classic cockroach. We have no idea the extent of the mess. All we know is that more and more of it will show up, and all of it will be ugly. Yesterday Morgan Stanley said it was taking an additional $5.7 billion writedown. UBS also recently took a huge additional writedown of $10 billion. (A billion here, a billion here. Pretty soon it adds up to some real money.) I do love the Morgan announcement yesterday:

"The results we announced today are embarrassing," Chief Executive John Mack said during a conference call with analysts. "This loss was the result of an error in judgment that occurred on one desk, in our Fixed Income area and also a failure to manage that risk appropriately."

Mr. Mack gets the prize for stating the obvious. But there is good news? Mack said he won't accept a bonus for 2007. I guess that means he gets to keep his job. Which is genuinely amazing.

In addition to writeoffs, the cockroaches will also produce ratings writedowns, as the ratings agencies, like Standard and Poor and Moodys, finally get their act together and drop the ratings on their customers, the ones who pay their salaries. (Think how hard that is.)

But what we know is also what management knows. Things are terrible and they ought to do something. Which many are. Morgan Stanley is taking $5 billion in fresh capital from a Chinese sovereign fund (sovereign means it's Chinese government money). And that injection caused Morgan Stanley's stock to rise 3.6% yesterday.

Which brings me to MBIA and Ambac. I've been eyeing them, thinking they were getting close to being buyable. Apparently not yet. Both are down heavily in early morning trading, after yesterday's news. Here's Bloomberg's story today (as posted after I posted this column):

MBIA Bond Risk Soars on $8.1 Billion CDO Disclosure

Dec. 20 (Bloomberg) -- MBIA Inc. tumbled the most since 1987, and the risk of default soared after the world's biggest bond insurer revealed that it guarantees $8.1 billion of collateralized debt obligations repackaging other CDOs and securities linked to subprime mortgages.

Credit-default swaps tied to Armonk, New York-based MBIA's bonds climbed 115 basis points to 595 basis points, the widest on record, according to CMA Datavision in London. MBIA shares plunged $6.90, or 26 percent, to $20.12 as of 10:27 a.m. in New York Stock Exchange composite trading.

MBIA posted a document on its Web site late yesterday showing it insured the so-called CDOs-squared, a potentially riskier form of security than what the company typically guarantees. Rising defaults on subprime mortgages packaged into securities have led to bond downgrades and threatened MBIA's AAA guaranty rating.

"We are shocked management withheld this information for as long as it did," Ken Zerbe, an analyst with Morgan Stanley in New York, wrote in a report yesterday. "MBIA simply did not disclose arguably the riskiest parts of its CDO portfolio to investors."

The disclosure followed Standard & Poor's decision yesterday to lower its outlook to negative for the AAA ratings of the bond insurance units of MBIA and Ambac Financial Group Inc. A telephone call to Elizabeth James, a MBIA spokeswoman, wasn't immediately returned.

"How is confidence expected to return to the capital markets when these types of surprises continue to pop up?" said Peter Plaut, an analyst at New York-based hedge fund manager Sanno Point Capital Management.

Credit-default swaps tied to MBIA's bond insurer, MBIA Insurance Corp., climbed the most in at least a year. The five- year contracts, used to speculate on the company's ability to repay its debt or hedge against the risk it doesn't, rose 95 basis points to 340 basis points, CMA prices show. That means it would cost $340,000 a year to protect $10 million in MBIA Insurance bonds from default for five years.

Contracts tied to Ambac rose 30 basis points to 595 basis points, according to CMA.

The Markit CDX North America Investment Grade Index, a benchmark credit-default swap index linked to the bonds of 125 companies, including MBIA Insurance, rose 0.75 basis point to 78.25 basis points as of 9:54 a.m. in New York, according to Deutsche Bank AG. It fell to as low as 76.5 basis points earlier.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

MBIA's disclosure explains why S&P and Moody's Investors Service turned more negative on the industry in recent weeks, Zerbe said. Last month, Moody's said MBIA was ``unlikely" to fall below its target capital level for an AAA bond insurer despite downgrades of securities backed by subprime mortgages. Ambac had been flagged as ``moderately" likely to need more capital.

``This disclosure completely changes our view of MBIA being a more conservative underwriter relative to Ambac," Zerbe wrote.

Subprime mortgages are made to borrowers with poor or limited credit histories or high debt burdens.

CDOs have accounted for the biggest portion of the more than $70 billion in writedowns in the past two quarters at the world's biggest banks. CDOs-squared have lost the most on a percentage basis among CDOs linked to subprime mortgages, New York-based Merrill Lynch & Co.'s third-quarter disclosures showed.

When announcing it would write down top classes of CDOs by $5.8 billion in the third quarter, Merrill cut the value of CDOs- squared by $800 million, leaving it with $600 million of ``net exposure."

Other securities firms including New York-based Citigroup Inc., Morgan Stanley and UBS AG have reported larger fourth- quarter CDO losses.

Here's Bloomberg's story from yesterday:

Ambac, MBIA Outlook Lowered by S&P, ACA Cut to CCC

Dec. 19 (Bloomberg) -- The ratings outlook for MBIA Inc. and Ambac Financial Group Inc., the world's largest bond insurers, was lowered to negative by Standard & Poor's, raising the specter of more writedowns for the companies' investment- bank clients.

S&P also cut its A rating on ACA Financial Guaranty Corp. to CCC, suggesting potential default. Toronto-based Canadian Imperial Bank of Commerce said today it may have $2 billion of writedowns on U.S. subprime mortgage securities it insured through ACA.

"The hits keep coming," said Gregory Peters, head of credit strategy at Morgan Stanley in New York. "It's been our view that these guys are in a much more difficult predicament than investors or the companies themselves believed."

Industrywide downgrades would lead to losses of $200 billion on securities as some banks would have to sell their bonds in a depressed market because of investment guidelines, according to data compiled by Bloomberg. MBIA's guaranty business stands behind about $652 billion of municipal and structured finance bonds, while Ambac's insures $546 billion of debt. Both are rated AAA.

S&P also reduced its outlook to negative from stable for XL Capital Assurance Inc. and placed Financial Guaranty Insurance Co.'s AAA rating under review for a possible downgrade. The actions were "prompted by worsening expectations" for insured nonprime residential mortgage bonds and collateralized debt obligations of asset-backed securities, New York-based S&P said.

Ambac rose 48 cents to $27.46 at the close of regular New York Stock exchange trading. MBIA dropped 68 cents to $27.02. The companies have lost more than half their market value this year.

The changes by S&P follow negative actions on Armonk, New York-based MBIA's guaranty business and CIFG Guaranty by Moody's Investors Service last week. Bond insurers are paying a price for expanding beyond their traditional business of backing municipal bonds to guaranteeing debt linked to riskier subprime mortgages and home-equity loans, as well as CDOs.

"Everyone got greedy and thought they were smart enough to write structured product insurance like it was the same as insuring municipal bonds," said Rob Haines, an analyst with CreditSights Inc. in New York.

S&P ran a stress test to determine the losses bond insurers would take on securities backed by subprime mortgages, including CDOs. Losses were projected at $3.1 billion for MBIA, $1.8 billion for Ambac, and $2.2 billion for FGIC.

MBIA's higher loss potential was attributed to the company's guarantees on securities backed by home equity loans, S&P said.

The ratings cut on ACA Financial, a unit of ACA Capital Holdings Inc., may lead to writedowns at Merrill Lynch & Co. and Canadian Imperial Bank of Commerce. Toronto-based CIBC said today it will likely take a large writedown because New York- based ACA insures about $3.5 billion of its U.S. subprime investments.

Merrill Lynch may have used contracts with ACA Capital to pass off the market risk of $5 billion in CDOs, Roger Freeman, an analyst covering the brokerage industry for Lehman Brothers Holdings Inc., wrote in a Nov. 5 report. If ACA Capital defaults on its swap contracts, Merrill Lynch could recognize unrealized losses on those securities of about $3 billion, Freeman wrote.

ACA Capital is required to post $1.7 billion in collateral if its rating falls at least two steps to below A-, management said on a Nov. 8 conference call. The rating was cut 12 levels today to CCC from A. The company said in a statement distributed by Business Wire today that it won agreements to prevent it from posting collateral until Jan. 18.

Bear Stearns Cos. and Merrill Lynch are among several major banks in talks to bail out ACA, the New York Times reported today, citing two people familiar with the situation.

"Effectively by bailing out the monolines, they're bailing out themselves, because the hedges they thought they had with them aren't really hedges," said Toby Nangle, who helps oversee $37 billion as head of global aggregate business at Baring Asset Management in London.

ACA Capital rose 34 cents to 65 cents in over-the-counter trading on that news. The shares, suspended by the New York Stock Exchange this week for breaching capitalization requirements, had plunged 98 percent this year.

ACA Capital as of June 30 had sold protection to 31 counterparties through credit-default swaps on $61 billion of highly rated securities, including CDOs backed by subprime mortgage securities, according to filings. CDOs are created by packaging debt or derivatives into new bonds with varying ratings.

The collapse of the U.S. subprime mortgage market has led to about $76 billion of losses at securities firms and banks this year. Subprime loans are made to people with poor credit.

Ambac, the second-biggest bond insurer, guarantees $546 billion of securities. MBIA stands behind about $652 billion of municipal and structured finance bonds, while FGIC Corp., parent of Financial Guaranty Insurance Co., insured $314 billion.

"We are confident the performance of our insured portfolio and the measures being taken to expand Ambac's capital position will be sufficient to return our outlook to stable," Ambac Chief Executive Officer Robert J. Genader said in a statement today.

For more than 20 years, the safety of bond insurance has eased the way for elementary schools, Wall Street banks and thousands of municipalities to sell debt with unquestioned credit quality. The bond insurers promise to make interest and principal payments as they come due on securities if the issuer falters.

"If these companies are going to survive, they've got to go back and focus on the core muni business," Haines said.

Moody's, Fitch and S&P, criticized throughout the credit slump for giving excessively high ratings to asset-backed debt, took a second look at the bond insurers in the past few weeks after sweeping downgrades of CDOs. The companies had issued reports as recently as October that said the insurers were unlikely to face capital constraints because of the subprime mortgage crisis.

The New York Times is a pinko, commie, left-wing, "gloom and doom" newspaper. It's not, of course. But many of my readers don't like it and get mad when I quote it. Many didn't like yesterday's story about housing problems in the Bronx, how people had bought houses they couldn't afford and could now lose them.

I read extensively. I quote from those places I find fascinating, relevant stories -- whether they be the Economist, the Wall Street Journal, the New York Times or Best Life (see next piece). I ask that you accept my judgment -- if I quote the piece, it's because it is worth reading. Whether you agree with or it, or not, that's your decision. My point is that I learned something, and I want you to learn something also. This column is not about politics. It's about how to protect, preserve and grow our assets.

As Reverend Ike once said, "The best thing you can do for the poor is not to be one of them."

Ten ways to outsmart the airlines. Excerpted from Best Life by Peter Greenberg.

In the past year, I have flown on 110 flights—and 11 arrived on time. ... Yes, 2007 will go down as the worst year in history for flight delays, cancellations, and stranded passengers. ..How did we get from bad to so much worse? Well, the Federal Aviation Administration is using a nearly 20-year-old computer system, and it shows. Among its many drawbacks, the air traffic control system does not adjust for increasing capacity in the sky. On the morning of June 8, 2007, a common scenario played out: The 20-year-old computers in Atlanta failed, and when the FAA rerouted flight-plan data to Salt Lake City, those computers overloaded. The result? Virtually every airplane on the East Coast was grounded for an average of four hours.

As if that's not enough, major carriers are understaffed and, as a result, have been canceling hundreds of flights in the last week or so of each month, creating massive delays (and stranding thousands). ... Northwest, one of the worst offenders, is operating with 15 to 25 percent fewer pilots and copilots than it employed in 2000. ... In the last week of June, a particularly bad month, Northwest canceled more than 1,000 flights.. ... Here's how to avoid the crush of modern commercial aviation.

1. Watch the calendar. Schedule air travel for the first 20 days of the month. That reduces the chances that your flight will be canceled because the pilot or crew has already hit the maximum monthly limit of 100 hours of work.

2. Avoid "direct" flights. The only good flight is a nonstop flight. Labeling a flight "direct" is an airline euphemism that means you'll stop at least once, exponentially increasing your chances of being delayed.

3. Sign up for e-mail alerts. Many airlines offer this service, as do Travelocity and Expedia. Or you can go to flightstats.com, a free service that tracks flights and alerts you when things are going wrong. To have text messages sent to your cell phone alerting you to flight delays, sign up at flightstats.com. You can also find updates at http://fly.faa.gov/flyfaa/usmap.jsp.

4. Leave at dawn. Get on the first available flight, preferably on a plane that spent the night at your airport. The biggest factor controlling delays is not where your plane is going, but where the aircraft assigned to your flight is coming from. Always call the airline before you leave for the airport and ask the agent to tell you the aircraft number of the plane assigned for your flight, and then ask for the status of that aircraft tail number. If you're heading to Los Angeles from Miami in two hours but the aircraft assigned to your flight is in Caracas…you're not going. To find out how to talk to a real live agent for any given airline, go to gethuman.com.

5. Get creative. If, despite using these strategies, you find yourself imprisoned for hours in an aluminum tube on the tarmac, you may have to resort to extreme measures. First, passengers who claim to be sick can be removed from the plane. I'm not advocating fraud here, but I could make a case that "sick and tired of being stuck on the runway" is a recognized medical malady, and I can't imagine any judge failing to sympathize. If you're more inclined to be a citizen journalist than an amateur actor, you can whip out a video camera. It gets the crewmembers' attention (they know they're likely to end up on YouTube, if not CNN), and you're not doing anything illegal. It worked for David Ollila one night in June, after his Comair flight from New York to Detroit was stuck on the ground for nearly four hours. Ollila interviewed the pilot on camera, and the pilot threatened to call the police. "That's an excellent idea," the cameraman responded. Sure enough, the cops came, everyone was let off the plane, and Ollila was cleared of any wrongdoing. Third, there's the lawyer approach: Claim false imprisonment and demand to be released. After being stranded for nearly nine hours on a Northwest flight in 1999, passengers sued and Northwest settled for $7 million. Ever since, airlines have taken the words false imprisonment very seriously.

6. Take 'em to court. In what could be the beginning of a trend, a woman named Jane Waun sued Spirit Airlines in small-claims court after the airline canceled her flight out of Detroit, stranding her family. In July, she won a $1,350.75 judgment, which reimbursed her for hotel and meal costs, a lost night at her destination, and the tickets she had to purchase on a different airline.

7. Take the train. The surefire way to avoid flight delays: Don't fly. On short-haul routes (e.g., Los Angeles to San Diego, or New York to Boston), don't even think of get­ting on a plane. Go with Amtrak. I recently raced a friend from downtown Manhattan to Washington, D.C. Our destination: 17th and K streets in D.C. We both left at the same time. He went to LaGuardia for the Delta shuttle. I headed for Penn Station and Amtrak's Acela. I beat him by 48 minutes. My fare on Acela: $172. His fare on the shuttle: $276.

8. Ship your bags. This beats losing them and waiting for them to return from some distant city.

9. Avoid major hubs. Use alternate airports. If you can fly into or out of these secondary airports, you'll reduce your chances of being delayed: Dallas Love Field, instead of Dallas/Fort Worth; Oakland or San José, instead of San Francisco; Houston's Hobby Airport, instead of Bush Intercontinental; and New York's Long Island MacArthur, instead of LaGuardia or Kennedy.

10. Build more time. Airlines sometimes leave only 60 minutes between connections. That's a recipe for ruining your trip.

My son caught an Amtrak train this morning. It left 4 minutes early. Go figure.

Technology in action:
A salesman checked into a futuristic hotel. Realizing he needed a haircut before the next day's meeting, he called the desk clerk to ask if there was a barber on the premises.

"I'm afraid not, sir," the clerk told him apologetically, "but down the hall from your room is a vending machine that should serve your purposes."

Skeptical but intrigued, the salesman located the machine, inserted $15.00, and stuck his head into the opening, at which time the machine started to buzz and whirl. Fifteen seconds later the salesman pulled out his head and surveyed is reflection, which showed the best haircut of his life.

Two feet away was another machine with a sign that read, 'Manicures, $20.00.'

"Why not?" thought the salesman. He paid the money,inserted his hands into the slot, and the machine started to buzz and whirl. Fifteen seconds later he pulled out his hands and they wer e perfectly manicured.

The next machine had a sign that read, 'This Machine Provides a Service Men Need When Away from Their Wives, 50 Cents.'

The salesman looked both ways, put fifty cents in the machine, unzipped his fly, and with some anticipation, stuck his manhood into the opening. When the machine started buzzing, the guy let out a shriek of agony and almost passed out. Fifteen seconds later it shut off.

With trembling hands, the salesman was able to withdraw his tender unit..... Which now had a button sewn on its end.

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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